Our office prepares and files many, many Medicaid applications each year throughout all 21 counties of our state. We routinely go over the assets a client has left to spend down. That’s when we sometimes find that a parent/grandparent has set up a 529 plan(s) for grandchildren. “Do we have to spend the money in these accounts on Dad’s care before qualifying for Medicaid”, we are asked.

529 plans are college savings plans named after the section of the federal law that establishes them. These plans allow a parent, grandparent – or really anyone – to transfer money into an investment account which is established for the benefit of a child, to be used for that child’s college expenses.

There are gift and estate tax advantages to these plans. Individuals may make contributions of up to $14,000 per person per year to a 529 plan. The gift and tax laws will allow a person to accelerate contributions so that he/she can contribute as much as $70,000 in one year for each beneficiary. This contribution will be considered as having been made over a 5 year period so that no gift tax will be triggered.

The advantage is that these contributions and the growth of these account(s) are removed from the estate for estate tax purposes. But, as I have stated so many times to clients and prospects, don’t confuse the gift and estate tax laws with the Medicaid rules. The outcomes can be very different. 529 plans are another example of that.

So, is a 529 plan a countable asset subject to Medicaid’s spend down rules? As with most things Medicaid related the answer is a bit complicated.

While the value of a 529 plan is removed from the contributor’s estate for estate and gift tax purposes, the owner and custodian of the account still has the ability to revoke it and pull the assets back and therein lies the problem for Medicaid.

If the applicant is the owner and custodian then he/she has not made a transfer of assets out of his name for Medicaid purposes. The money in those 529 plans is countable and must be spend down. That means the money must be spent for the person’s needs and not his/her granddaughter’s education.

On the other hand, if he/she sets up the account(s) but names someone else – an adult daughter for example – as the owner and custodian then he or she has no control over the accounts. The daughter may be able to revoke them but the applicant cannot. In that case, for Medicaid purposes, he made a transfer for less than fair value. So is he then “out of the woods”? Possibly but we need to know more.

The next question is when did he/she make the contributions to the accounts? If any were made in the last 5 years, they would be subject to Medicaid’s 5 year look back and would result in a Medicaid penalty.

In each individual case we need to examine how the 529 plan works and who the account owner and custodian are. As with any Medicaid questions there isn’t a “one size fits all” answer.

To discuss your NJ Medicaid matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

Search NJ Estate Planning

Do you know someone that can benefit from our services? If so, please send us
their contact info.